Thesis for Nestle

• The purpose of this write-up is to pitch Nestle as a long

• $94B in revenue in 2020

• 26 years of dividend increases ($3.07 dividend per share in 2020)

• Questions

  • How have each of the groups performed over time?

  • Is the confectionary business declining?

  • Are the ADRs entitled to the same dividend?

    • The ADR dividend is paid on average one month after the dividend on the ordinary share. Most ADR holders are US residents and are entitled to a favorable withholding tax rate. After the payment of the dividend on the ordinary share, there is an extensive process between Citibank (Nestlé's ADR depositary bank) and the Swiss Tax Authorities that enables these US residents to benefit from a favorable 15% withholding tax rate. This results in the delayed payment of the dividend to ADR holders.

  • What is their Health Science group really doing - seems a bit all over the map - EPI, Allergy, Nutrition, etc.? All food related I guess

  • Are people consuming less ice cream / less milk products than 10 years ago?

• Nestle's BOD is 14 people including CEO and former CEO, CEO of Consumer at Adidas, For US Secratary of Agriculture, Former CFO of Credit Suisse, and many other Swiss people

• History of Acquisitions and Dispositions is wild

  • https://www.nestle.com/investors/overview/mergers-and-acquisitions

  • 2000 - Nestle buys PowerBar

  • 2001 - Nestle buys Ralston Purina for $10.3B

  • 2006 - Nestle buys Jenny Craig (600M) and Novartis Medical Nutrition (2.5B)

  • 2007 - Gerber (5.5B)

  • 2010 - Frozen Pizza Division from Kraft ($3.7B) - Digiorno, CPK,

  • 2012 - Pfizer Infant Nutrition ($11.85B)

  • 2013 - Divest Jenny Craig

  • 2014 - Divests, Juicy Juice, PowerBar

  • 2015 - Adds Merrick Dog Food

  • 2017 - Acquires Majority of Blue Bottle Coffee, Chameleon Cold Brew

  • 2018 - Acquires Perpetual rights for Starbucks packaged goods, sells ice cream business to joint venture Froneri, sells most of its American candy brands including Crunch, 100 Grand, Laffy Taffy, Nerds, Tic Tac, etc. to Forrero Rocher for $2.8B (probably a steal for Forrero) although it seems candy is definitely not a global thing as Warren Buffett points out

  • 2020 - Buys Aimmune Therapeutics (peanut allergy medicine)

  • 2021 - Acquires Bountiful Co ($5.75B), Sells non-premium water segment

• History

  • Nestle started in 1867 founded by Henri Nestle as an infant food company and merged with Anglo Swiss Condensed Milk Company in 1905, creating Nestle Group

    • The original product was milk mixed with Wheat flour and sugar to help infants who could not breastfeed and address high mortality rates

  • 1914-18

    • War disrupts supply chain of products but also produce demand for Nestle products. It becomes popular for British Army

  • 1921-29

    • Company runs its first ever loss and research is focused on HQ in Vevey Switzerland

    • Nestle buys Cailler chocolate, the largest chocolate company in switzerland

  • 1934

    • Malted chocolate drink Milo is launched in Australia

  • 1938

    • Nescafe is launched as a powered extract of pure coffee; this was driven by a huge coffee surplus in Brazil that was going unused

  • 1939

    • Launches second headquarters in US

  • 1945-47

    • Nestle becomes a favorite of soldiers because of Nescafe

    • Nestle buys Maggi, a make of soups, bouillons, and seasonings

  • 1947 - 59

    • Nestle continues to launch products

  • 1960-80

    • Goes deeper into ice cream, buys Stouffers in 1973

    • Buys a minority stake in L'Oreal in 1974

    • Becomes Nestle SA

  • 1981-2005

    • Stouffer's launches Lean Cuisine in 1981

    • Nestle buys Carnation company (Coffeemate brand) for 3B in 1985

    • Launches Nespresso brand in 1986

    • Buys Rowntree Mackintosh, maker of Kitkat, Smarties in 1988

    • Acquires Perrier in 1992, San Pelligrino in 98

    • Ralston Purina in 2001

    • Haagen-Dazs and Dreyers in 2003

  • 2006 - Today

    • Buys Gerber in 2006, goes deeper into nutrition business with Nestle Health Science

    • 2020 Nestle acquires Zenpep (exocrine pancreatic insufficiency) due to cystic fibrosis, Vital Proteins and Aimmune

  • Looking back through the history, it seems that brands were really the focus up until about 10 years ago when they started to really push into pharmaceuticals and Nestle Health Science. The business is still mostly beverages, pet food, and branded products.

• Financial and Operating Goals

  • "Our objective is to achieve sustained mid single-digit organic sales growth through a combination of rapid innovation, portfolio management and market share gains."

• Accelerating Growth Strategies (from 2020 Annual Report - https://www.nestle.com/sites/default/files/2021-03/2020-annual-review-en.pdf )

  • High-growth categories of coffee, pet care, nutrition, water and nutritional health science. Together, these represented 63% of sales and grew by 3.8% in 2020.

  • High-growth platforms, such as plant-based food and ready-to-drink beverages. In 2020, vegetarian and plant-based food offerings continued to see strong double-digit growth.

  • Trusted brands, such as Maggi, Milo and Nido. 34 of our brands generate over CHF 1 billion each in annual sales at retail level.

  • Regions with high-growth potential. In 2020, emerging markets represented 41% of sales and grew by 3.4%.

  • Digital marketing and e-commerce. In 2020, our e-commerce sales represented 12.8% of sales and grew by 48.4%, and digital as a % of total media spend increased to 47%.

  • Direct-to-consumer. In 2020, direct-to-consumer businesses represented 8.6% of sales and grew by 12%.

  • Premiumization. In 2020, our premium offerings represented 30% of sales and grew by 9.5%.

  • Affordable and accessible offerings. Sales of affordable, accessible products, many nutrient-fortified, grew by 8.1% and accounted for 18.8% of emerging market sales in 2020.

• So its really the premium and direct to consumer businesses that are driving growth

• Cost Management and Efficiencies

  • By the end of 2020, we achieved CHF 2.8 billion in savings, exceeding our target of CHF 2.0-2.5 billion gross savings for the period from 2016 to 2020

• Capital Allocation

  • In combination with our operating performance, this has allowed us to increase our Return on Invested Capital (ROIC) by 240 bps, from 12.3% in 2019 to 14.7% in 2020

    • This seems low but is correct; it hasn't changed - always has earned about 12% ROIC

  • 2020 was a relatively large Capex year compared to historicals - 4.6B vs. under 4B for each of the last 6 years

  • "Disciplined" portfolio management. LOL buying 75 business is disciplined?

    • We are disciplined when it comes to mergers and acquisitions in order to protect our ROIC. We have clear governance in place, with precise accountability and targets. Prospects must have a good strategic and cultural fit with our organization and offer attractive financial returns. We look for creative ways to approach deals and build partnerships that enhance our optionality

  • Returning Cash to Shareholders

    • We have demonstrated our strong commitment to maintaining a high level of reinvestment into the business, while at the same time continually increasing capital returns to shareholders. We do this by increasing our dividend year after year. Based on our 2020 performance, the Board of Directors has proposed a dividend increase of 5 centimes to CHF 2.75 per share to be paid in April 2021. This will be our 26th consecutive annual dividend increase. As a result of our strong free cash flow generation and business disposals, we continued to return excess cash to shareholders through share buybacks. Share repurchases amounted to CHF 6.8 billion in 2020, as part of our three-year CHF 20 billion buyback program that started in January 2020. Over the last 15 years, Nestlé has returned CHF 163.7 billion to shareholders, of which CHF 72.5 billion has been in the form of share repurchases. Over the same period, the number of shares outstanding has been reduced by 26.8%.

  • Long Term Commitments

    • We have made bold commitments to achieve net zero greenhouse gas emissions by 2050 and make 100% of our packaging recyclable or reusable by 2025.

• R&D Centers

  • Setup for a bunch of food and pet care accelerators across the world including India and Cote De Ivoire. You can get a Phd working at Nestle R&D facility

  • Increasingly, our brands employ a data-driven, audience-first approach to tailor messaging to their consumers’ needs, while respecting privacy. In 2020, more than 60% of all digital media campaigns leveraged this strategy of personalization at scale. These campaigns are supported by an expanded network of 30 category and market content studios that efficiently deliver dynamic, high-quality personalized content.

• Coffee / Drinks business

  • New Starbucks branded products, new Nescafe 2x caffeine, new cold brew consumables (actually interesting)

• Petcare business

  • Added Lily's Kitchen to the business to serve younger pet owners

  • Seem to be leaning on cat expertise

• Nutrition and Health Science

  • Note Chairman / Former CEO sits on board of Roche

  • NANCare - milk oligosaccharides for microbiome health; Brain expert ketogenic drink

• Prepared Dishes

  • Maggi's liquid Boullion, new sweet earth pizza flavors, new lean cuisine, and digiorno offerings

  • Totole premium cooking sauces

• Milk Products and Ice Cream

  • Milk products and restrictions continue to be a challenge right?

  • Starbucks creamers launch

• Confectionary

  • Leaning in on baking during the pandemic; Nestle Toll House

  • 85th anniversary of KitKat

    • Launch of seasonal shapes

    • Customized flavors

  • Yes! Plant protein snack bars

  • Nestle premium chocolate gift box

• Water

  • Sold generic water businesses

  • Plant infused beverages from Buxton

• 2020 Highlights

  • Althera HMO, hypoallergenic formula for babies with Cow's Milk Protein Allergy (CMPA)

  • Bear Brand - Personalized beverages in Philippines

  • Education on cooking for kids; Youth program for virtual internships

• Stakeholder highlights

  • AA MSCI ESG rating

• Financials

  • Business declined 8.9% YoY while operating margins improved up 10-200bps depending on your profit measure. The company maintains about a 14% net profit

  • Debt increased (likely due to the acquisitions of AImmune, Lily's) and also share buybacks of 6.8B which were debt financed

  • The company cut 20k employees

  • Pet Care saw high single digit growth, coffee mid-single digit growth, prepared food mid-single digit growth.

  • Vegetarian saw double digit growth and Nestle health sciences grew at a double digit rate

  • Confectionary growth was negative; Divestitures drove 4.6% sales decline

  • Regionally

    • US sales down 10%; China down 14%, Brazil down 23%

    • Us overall is biggest market, followed by CHina, France, UK, Brazil, Philippines, Mexico, etc.

  • Pet Care

    • 14b in sales growing 10% YoY; 3b in operating profit (22% margins)

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• SOTP Valuation

  • Powdered and Liquid Beverages

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  • PetCare

  • Nutrition and Health Science

  • Prepared Dishes

  • Milk Products and Cream

  • Confectionary

  • Water